Do your trade customers take an age to pay you? They do! Have you ever wondered why? Here, Steve Jordan suggests that the old accounting rules just don’t apply in today’s financial environment.
According to the Governor of the Bank of England, interest rates in the UK are not going anywhere fast. The same could be said of many other countries in the world where growth is still sluggish. So, if interest rates are low, there’s not much point in hanging on to your money is there. Perhaps it’s time for all those company accountants, who traditionally delay paying suppliers in the hope of maintaining their debtor-day figures in line with the text book, to get real. The text book is out of date – and, if you still follow it, so are you.
“It’s better in our bank account than theirs,” was the mantra for years. Well maybe in the days when cash was earning 10%, it was. But with interest rates barely raising an eyebrow, it’s really not true anymore.
Financially, nowadays, it makes no difference whether you pay your suppliers this month or next. So why do so many companies still play that silly game of dragging out payment until everyone starts getting nasty? There can be only three conclusions: 1) they haven’t yet woken up to the fact that it’s not doing them any good: ignorant, 2) they don’t have the money: insolvent, or 3) they are running an overdraft that they want you to pay for: unreasonable.
Whichever it is, it’s not a really good message for them to give their suppliers is it especially when, in the moving industry, so many companies are simultaneously customers of and suppliers to each other. Some companies do run on an overdraft of course, but is it reasonable for them to expect their suppliers, who might be doing the same, to pay their costs? I think not. It’s just theft by another name. Anyway, as interest rates have tumbled, so overdraft rates are not as high as they once were and I would still argue that the small benefit of holding off payment is greatly overshadowed by the benefit received from paying on time. If you don’t have an overdraft, you really have no excuse at all.
A different approach is needed for today’s world. Let us look at the benefits of paying suppliers on time:
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You keep your administration simple;
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You avoid the constant barrage of phone calls from credit controllers;
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You save money by not having to pay additional charges if debt collectors get involved;
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You keep your suppliers happy so they want to work for you and do the best job they can;
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People think you are a great company and promote you whenever they can: all your suppliers become advocates;
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People in bars don’t say bad things about you behind your back.
All good stuff with real commercial benefits. If you get one job a year because you pay on time it will cover any additional overdraft costs you might have incurred along the way. By contrast let’s look at the benefits of hanging on to your cash as long as you can:
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You have more cash in the bank (but it’s not really yours);
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Your overdraft (if you have one) is reduced so you pay a little less;
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Your bank manager is happy with you because he can invest your money better than you can (and pocket the difference);
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You have a smug feeling of exercising power over your suppliers;
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… nothing else.
Just as suppliers become advocates for the companies that pay them on time, so they will very quickly spread the opposite about those who don’t. You will never know how much business you have lost.
Surely, in a small industry such as ours, it makes sense to look after each other. Of course, when all the quantitative easing kicks in, and interest rates rocket, the old rules might work again - but right now, they don’t. Anyone who sticks by them simply demonstrates to the world that they are either ignorant, insolvent or just unreasonable. Which are you?
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